Gambling It Away -- As Orange County Treasurer, Robert Citron Took Too Many Risks

SANTA ANA, Calif. - If the road to hell is paved with good intentions, Robert Citron walked it like a man possessed.

He borrowed short, invested long and left behind incalculable economic ruin.

The story of the collapse of the Orange County investment pool - a loss now estimated at $2 billion to $3 billion affecting 180 cities, school districts and other agencies - is as tightly wound as the man himself.

Brusque and businesslike, Citron, 69, lived up to the penny-pinching stereotype of a treasurer-tax collector. There were the well-worn suits, the calculator wristwatch to divvy up restaurant bills, the publicized spat with the county years back when he claimed he had been shortchanged $12 in a paycheck.

"The riskiest thing I've ever seen Bob Citron do is get a new pair of glasses," said Bill Berke, a Santa Ana optometrist who has known Citron casually for 15 years.

But one did not have to look far to find quirks in the button-down demeanor of the only elected Democrat in Orange County government.

In 1986, he composed a 14-page ode to Chrysler automobiles. (His 1994 New Yorker is the 25th Chrysler he has owned.)

There is his affinity for Navajo jewelry and a zeal for University of Southern California football so intense one acquaintance swears he has a Trojan toilet seat in his home. His car horn plays the Trojan fight song.

He amassed a collection of 300 ties, though intimates say he wears few of them.

The son of a homeopathic physician who treated W.C. Fields for alcoholism - and later successfully sued Fields for nonpayment - Citron would prescribe unorthodox remedies for friends from his collection of homeopathy texts.

A devotee of Fields' work, he and his wife of 39 years, Terry, once lobbied for a stamp and a statue of the comedian.

Yet as the crisis has mushroomed into a full-blown calamity with implications reaching far beyond the county, it became tragically clear that Citron's ultimate love was neither turquoise jewelry nor tailback sweeps.

The frugal treasurer who once boasted of trimming his department's operating budget by $843 was a high-risk gambler - with other people's money.

It is a point few financial experts contest. Strip away the recent obtuse argot - reverse repurchases, derivatives, structured notes - and what remains is a rickety tower of unhedged bets that interest rates would remain relatively stable.

In the case of derivatives, he was dealing with investments so esoteric even the sophisticated financial professionals who design them have difficulty understanding their behavior in volatile market conditions.

"What you have is a person who was trying to beat the system, and we're paying the price," said Larry Smith, an investor who supported John Moorlach, Citron's Republican opponent in the June election.

What you also have is a man consumed by his work.

"A lot of us do other things; he had his work," said Lee Buffington, former president of the California Association of County Treasurers and Tax Collectors, and a Citron admirer. "All he wanted to talk about was his investment business."

That Citron's personal hubris played a major role in the crash seems uncontestable. He was good, and he knew it. He was proud of his stellar record and did not take kindly to anyone second-guessing him.

"We believe the current management style, although not the norm for county government, is the best one for the treasurer-tax collector," Citron wrote last year in response to a county auditor's report that criticized him for running his office without adequate controls.

But that alone does not explain how a committed public servant of 24 years would end up taking - and being allowed to take - such enormous risks in the first place.

A look at Citron's business mail in late 1979 holds some early clues.

Proposition 13 - the statewide referendum to cut local property taxes - had passed the year before, but inflation-plagued taxpayers remained on the warpath, nowhere more so than in Orange County.

At tax time, someone sent him a tea bag, a clear reference to the Boston Tea Party. Someone else sent a swastika.

The inflation bogeyman that turned taxpayers into tightwads was only part of the problem from a treasurer's perspective.

Restrained by law from investing in anything but the safest government bonds, treasurers found themselves earning perhaps 6 percent in an era of double-digit inflation. In terms of buying power, such investments were losers.

"The prudent man was no longer prudent," said Dan Ardell, an adviser to the county retirement fund who has known Citron since 1981. "What had been a good decision was wiped out with so much inflation. You had to look at alternatives."

Citron had something in mind.

The long roll

Within six years of that gloomy Christmas of 1979, Citron could boast a cultish following throughout the governing class of Orange County.

To a large extent, he had solved the puzzle of how to mollify taxpayers but keep coffers full by lobbying successfully for a law to allow treasurers to invest using reverse-repurchase agreements.

This is how they worked: Citron took money from the county investment pool and bought bonds. He then put the bonds up for collateral to Wall Street lenders in exchange for cash, which he used to purchase more bonds. In essence, he was wagering on the difference between the short-term interest he paid on the loans and the long-term interest he earned on the bonds.

This arbitrage strategy promised higher yields - and higher risks - than the frumpy investments of yore.

And it worked.

During the last six months of 1981, Citron earned 17.66 percent on the county investment, and his reputation as a hard-charging money manager spread fast.

"Bob's a very aggressive investor. He treats the Orange County dollar like it's his own," a senior executive of one securities brokerage said then.

The treasurer earned $172 million for the county in 1985 - and stopped reading his annual report aloud to the county Board of Supervisors. The supervisors, who had yawned and fidgeted during his presentations, were only too happy to be spared the mind-numbing details of money management.

In praising the treasurer's efforts, then-Supervisor Ralph Clark joked about Citron's absence.

"Golden as silence is, I don't think we should let this year's outstanding report pass by without comment," Clark quipped before the document was rubber-stamped.

Reflecting on those times recently, Clark defended the board's trust in Citron.

"Sure you felt a sense of security with him, and the figures always supported it," he said. "There was always money coming in."

That was true.

One Friday in 1986, Citron invested $690 million - about a third of the county's $2 billion portfolio. He turned a $509,000 profit the following Monday.

Even when his luck was bad it was good. A crisis in the European currency market in 1992 forced him to sell $400 million in complicated securities that were keyed to the difference between U.S. and Swiss interest rates. But where others were burned badly, he pulled out in time to escape major damage.

By the start of the '90s the guru of California treasurers answered to no one. Roaming the outer reaches of the bond market, cashing in big year after year, basking in the aura of his following, there was scant time for the Shirley Grindles of the world.

Grindle, a local campaign-reform activist, believes Citron's arrogance surfaced in a recent financial-disclosure form.

On it, Citron listed a number of small gifts he received as treasurer in 1993, including $31.50 worth of salmon from a Seattle investment adviser.

The gifts he declared totaled a less-than-scandalous $324.16. But Grindle believes focusing on the amount misses the point: Any gifts received after June 24 of that year violated a new county gift ordinance.

Citron, whose salary was $104,350 when he was forced to resign Dec. 4, said he thought he could accept the gifts because they came from companies dealing with the county's retirement fund, which is outside its main portfolio.

If he sometimes thought he was above the fray, psychologists and other experts agree it would be in character for such a powerful figure.

"A sense of arrogance helps people do many difficult things," said Dr. Mark Zetin, a human behavior professor at University of California, Irvine.

Ultimately, he said, "there's a sense that `I've been right so many times, it's hard to admit I've made a mistake.' "

It's still unclear whether Citron believes he was wrong, either in accepting the small gifts or in the way he managed the $20 billion investment pool.

In the end, it all came down to trust. The public trusted local officials with their money, and local officials trusted their money to Citron, an apparent paragon of prudence and restraint.

His personal investments - savings accounts and certificates of deposit - did not fit the profile of a risk taker.

He rarely traveled. He lived in a modest home in Santa Ana, and he accounted for every dime, even while lunching with the boys at the Santa Ana Elks Club.

"He is very conservative, very parsimonious, you might say," said County Clerk Gary Granville, a longtime friend and occasional lunch companion. "If you and I went out to lunch and the bill was $12, you'd pay $6 and I'd pay $6, or one of us would pick up the whole thing. If I went out to lunch with Bob and my share of the bill was $5.12, then that's what I paid."

His reputation helped sell the county's investment program. He also had an assistant who figured prominently in the brewing debacle.

"Matt Raabe did a lot of the talking for Bob," said Peer Swan, president of the Irvine Ranch Water District, one of the pool's major investors. "Matt was Bob's alter ego, and Bob would defer to him. Bob was doing the investing, and Matt went around the county and told everyone rosy things."

Raabe could not be reached for this report; Citron himself referred all questions to his lawyer.

Citron's ingenuity was tested in 1992 when the high-yield bonds he'd bought in the depths of the '80s recession began to mature. Bonds were no longer paying 10 percent interest. To maintain the fat returns, Citron had to up the ante, borrowing even more against the pool to boost returns.

Again his strategy paid off. Returns on the competing state investment fund fell three points; Citron's fund lost just one-quarter point.

"The only difference I'm aware of in his strategy was the amount of leverage he was using," Auditor-Controller Steven Lewis said.

Another challenge - rising interest rates - surfaced, but Citron assured edgy investors he had an answer for that, too. A wrong one.

"My current investment strategy takes into account the inevitable but unsustainable rise in short-term interest rates," he wrote in a March 9 letter to Mary-Jean Hackwood, administrator of the Orange County Employee Retirement System.

Citron's financial plan appears to have involved little more than staying the course.

He stuck with his leverage and his reverse repurchases when the Federal Reserve increased interest rates a quarter of a point in February.

He stuck with them through March, when an anonymous bond expert in Derivatives Weekly described his investment pool as a "death spiral."

He stuck with them later that month when the Fed increased rates again.

And still he wouldn't - or couldn't - budge.

In April and May, when his Republican challenger, Moorlach, was saying the pool was dangerously leveraged, Citron kept borrowing.

About that time nervous brokerage firms and investors started calling.

Citron and his staff were reassuring when people such as Patty Kong, assistant finance and administrative services director for the city of Mountain View in Santa Clara County, asked about their investments.

"They said they hadn't changed anything that they were doing before, that it was under control and being managed as it always had been. They said, `This is politics.' They thought it was politically driven, and that seemed to make sense."

On May 6, Moorlach examined Citron's investment portfolio.

"I just freaked out," he said.

Through a public records request, he had gotten the list from Citron and faxed it to half a dozen bond and securities dealers for analysis.

"It was the worst portfolio they'd ever seen," Moorlach said. "I felt sick. I thought, `Great. I'm gonna win, then two years from now, it's going to blow up.' "

Two weeks later, Moorlach sent a letter to Tom Riley, chairman of the Board of Supervisors, that turned out to be spookily prophetic: The practice of borrowing to buy more bonds and betting that interest rates would not rise was a formula for disaster.

"It is of great concern to me as a citizen of Orange County," Moorlach wrote, "to see our treasurer wager away our tax dollars on long-term bets. And he's doing it under the noses of elected officials at the Board of Supervisors and at almost every small district level."

On June 8, Citron was re-elected handily.

Later that month, a dozen local governments voted to borrow a total of $1.2 billion, with Citron's encouragement, and deposit it in the fund to earn extra revenue. Experts now estimate that the fund had already lost at least $500 million. But as the summer progressed, Citron continued peddling financial elixirs. He says now that he was unaware of the losses.

"We did not know at the time," he told the Register recently. "We never made a calculation of market value. Our strategy was hold until maturity."

The unraveling

Citron was still sticking with his strategy when Swan, a savvy financial pro in his own right, started snooping around the county portfolio in October.

Swan was looking for signs that Citron was adjusting the fund to reflect rising interest rates. When he saw otherwise - and couldn't persuade Citron to act - Swan pulled out two $50 million chunks, creating an instant cash crunch.

"I didn't feel it was especially dramatic," he said. "When you're dealing with a large fund like that, you can't just walk up and demand your $400 million. That would be irresponsible. We figured it would take about eight weeks to get our money out, and by that time property taxes would be due and they'd have another billion coming in."

How did $100 million in withdrawals - small change in the context of a $20 billion fund - set into motion a sequence that led to the downfall of one of the nation's richest counties?

Citron's bad bets had whittled the cash on hand to meet emergencies and satisfy investors' demands from a robust $2 billion in the spring to less than $400 million by November.

Still, county officials thought they could hang on. They asked Wall Street firms not to turn a paper loss into a real one by selling the billions of dollars worth of the pool's bonds the firms held as collateral.

But Wall Street had little incentive to help: Delaying the sales of bonds could mean losses for the brokerages.

CS First Boston was the first to break ranks by putting its entire $2.6 billion stake on the market Dec. 6.

Hoping to prevent further sales, the county filed for bankruptcy protection. But other Wall Street firms ignored the bankruptcy filing and joined the rush to sell off the bonds, liquidating all but $2.1 billion of the $13.5 billion they held.

A widely shared view in financial circles is that Citron mistakenly believed he had enough liquidity to weather the rise in interest rates until they stabilized.

`If he had had more cash on hand, it's possible he could have kept going on with this strategy and everything would have come out OK," said Charles Cuny, a University of California, Irvine, finance professor.

But others find it hard to fathom that Citron did not grasp how dangerous it was to entrust the entire portfolio to the whims of the Federal Reserve, which controls interest rates.

Others take the criticism a step further, suggesting that Citron knew the fund was in trouble - it was already losing tens of millions by the spring - but would not admit it for fear it would cost him the election.

And where were the county supervisors?

A 1991 county audit calling for more oversight apparently made it to the Board of Supervisors in 1993, but was never placed on their agenda where it would have been subjected to public scrutiny.

"We had no reason to doubt him," Supervisor Harriett Wieder said. "Moody's Investor, Standard & Poor's, Wall Street - everybody anointed him as the best treasurer in the world.

"What did I know about those investments? What did anybody know? None of us ever heard of derivatives or reverse repos any more than you have."

The learning curve began to rise a few days before the fiasco became public. County Administrative Officer Ernie Schneider met with each supervisor and disclosed the portfolio's $1.5 billion drop.

Despite concerns about Citron's well-being of late - a county mental-health team was dispatched to his home recently - friends say he is coping with courage and dignity.

As frazzled county officials groped for solutions to the crisis on Dec. 6, a somber Citron attended a dinner of the USC Trojan Club of Orange County.

Friends said he wishes he could help but knows there's nothing he can do.

"Once you get to the age Bob is at, you can't outlive your mistakes and come back from them," Granville said. "I think he realizes that."

Orange County Register staff writers Liz Pulliam, Ronald Campbell and Chris Knap contributed to this report.